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The Federal Reserve warned markets at the start of the year that it expected to raise rates four times in 2016. But so far, it hasn’t happened. And markets think there’s only about a 15 percent chance it will happen at the Fed meeting that wraps up Wednesday.
Why has the central bank failed to pursue its own well-publicized plans? You can’t point to cataclysmic economic events. The unemployment rate continues to tick down; GDP growth has been slow but steady; and there’s evidence that wages are finally starting to improve.
Nonetheless, there is a sense of real economic fragility, a fear that one wrong step could upend the US economy and set off a global recession. That’s a risk the Fed has been unwilling to take.
But the result is that we keep ending up in the same place. Every few months, policy makers dutifully mull a rate increase as markets collectively snicker.
It’s gotten so bad that after the June meeting, investors simply ignored the Fed’s explicit words. Every single member of the Federal Reserve’s rate-setting committee said there would be at least one increase before the close of 2016, yet markets still pinned the odds at less than 50-50.
That may seem to portend a crisis of credibility, and perhaps it does. But there are lots of occasions when it’s better to be right than consistent.
And it’s vital to keep in mind that the Federal Reserve members aren’t economic puppet-masters empowered to set interest rates at whatever level they like. They are servants of the real economy, trying to figure out what level of short-term interest rates the economy needs, so that inflation and unemployment can both remain low.
So the reason the Fed hasn’t raised rates in 2016 isn’t because of some lack of will. It’s because the global economy won’t permit it. All around the world, there are forces keeping rates down — forces that the Federal Reserve can’t simply defy.
Most immediately, there’s been a global rush for safe investments. With growth slowing in China and barely visible across Europe, investors have been seeking safety in long-term bonds with remarkably low yields — sometimes even negative yields, meaning that investors actually get less money back than they first put in.
Were the Fed to defy this global pressure and attempt to push rates up, it could distort the market enough to set off a recession.
All of which raises a question: Why consider a rate increase at all? Why not dispense with earlier plans and just announce that rates will remain at current levels until circumstances change?
A few reasons. First, sustained low rates could conceivable spark a bubble, as investors look for unconventional ways to earn higher returns. Second, low rates could create an opening for accelerating inflation. And third, when the next recession hits, the Fed won’t be able to cut rates by the usual 3 or 4 percentage points if those rates are already close to zero.
However, the very fact that the Fed has repeatedly declined to raise rates in 2016 shows that on balance its members think it’s better to accept these risks and keep the stimulus flowing.
If market predictions are right and the Fed demurs again this week, it’ll have a few more chances later this year.
Even then, however, 2016 is certain to end quite differently than the Fed predicted. Rates aren’t going to climb above 1.25 percent, as anticipated; they’ll be several steps lower, closer to 0.5 percent.
But there’s a good explanation for that. Every time the Fed considers pulling the trigger, the real economy gives it a reason to hold its fire.

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